Author: marklutter

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Questions and answers on private cities

I was just informed my Freeman piece on private cities was reblogged by Don Boudreaux, Arnold Kling, and Isegoria. First off, thanks! It’s fun to see my piece making the rounds, especially as it is one of the first I wrote. Before writing on why private cities haven’t emerged, I’d like to argue that they are going to emerge.

The most promising development is in Honduras. Honduras passed a law allowing ZEDEs (zonas de empleado y desarollo economico). ZEDEs are granted wide degrees of autonomy, being exempted from Honduran civil and commercial law. Currently the Committee for the Adoption of Best Practices is writing a set of guidelines that ZEDEs will have to meet. At least one company interested in Honduras is trying to start a proprietary community.

Beyond Honduras, there are several other countries that have expressed interest in setting up similar zones. There has also been a resurgence in interest cities, with books such as Glaesars Triumph of the City. I think the trend is toward decentralization and one aspect of that will be private cities.

Kling raises three questions as to why there aren’t private cities:

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Monarchists and libertarians

There is an odd development in some certain libertarian circles, an embrace of monarchy. The standard argument is that monarchies are more likely to have libertarian policies because the country is closer to private than in a democracy. The monarch has a long time horizon, wanting to maximize the value of his country for his children (first male child?), while the politicians in a democracy have a time horizon of just the next election. While the argument is plausible on its face, it contains many implicit assumptions which, once shown, demonstrate the silliness of the idea.

The piece that provoked my ire is by the Mad Monarchist, writing on libertarian monarchy. He begins with a misreading of history, or at the very least, very misplaced values:

In the past, I have touched on how the very monarchial Middle Ages was perhaps the closest the world has ever come to the totally privatized society that many libertarians dream of.

He does not name any of these libertarian monarchical societies, so I am forced to speculate on what they are. Nevertheless, it shows a very bad misreading of history. The most important event since the neolithic revolution was the industrial revolution. Prior to the industrial revolution man lived in the world of Malthus. Sustained per capita economic growth was unheard of. Any increase in production meant an increase in population, not the standard of living. This changed with England.

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Exits, left and right

In a previous post, exit and ideology, I argued that exit should be framed as a leftist value. My colleague, Ezra Jones, responded, pointing out my failure to define terms as well as attempting to counter my arguments. It is always interesting to read critiques of your work as readers often have a different impression than what one is trying to convey. Perhaps this is indicative of my writing ability more than anything else; however, I will attempt to clarify my meaning before responding to his objections.

I implicitly defined exit as a particular institutional arrangement of small separate communities with a low cost of exiting your community and entering a new one. This is a rather constrained definition, but the one Scott Alexander used in his essay which inspired mine.

I was admittedly sloppy in my use of left and liberalism. Part of the reason is an inability of mine to fully understand some distinctions. Another reason is my inability to articulate distinctions I have an intuitive understanding of. Here I will try to define the left through two aspects, change and progress. Change is the original defining feature of the left, coming from Paine’s arguments with Burke. Progress is more difficult, but I understand it as a general improving of the human condition.

Jones’ main charge is that exit, as I identify, is more interested in conservation than change. While a fair charge given what I wrote, I’m afraid I failed to fully communicate my vision. First, as a more technical point, exit itself is a radical concept given the current world order. Allowing peaceful secession, even if to preserve ethnic identity, is nearly unprecedented in history. This suggests a closer affinity to the left than Jones seems willing to admit.

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How private cities can help the poor

A piece on private cities I wrote was published today in the Freeman. This sentence captures the idea, perhaps the most unappreciated idea in economics:

Proprietary communities offer a solution to a host of problems commonly assumed to justify government intervention. Private property internalizes externalities. Proprietary communities take advantage of that fact by creating private property over land spaces traditionally thought of as public domain. They work by creating a residual claimant in the provision of public goods. That is, proprietors keep as income the rents collected through leases after costs are deducted.

Here’s another important point:

An additional advantage of private cities is that they incentivize institutional change. Institutional change is rare because of the logic of collective action. While the gains outweigh the costs of protecting private property rights, the gains are dispersed and the costs are concentrated. Those benefiting from such change have an incentive to free-ride, letting others agitate for the change.

Poor countries are poor because their governments are predatory. Proprietary communities concentrate the benefits of economic liberalization, increasing the likelihood of success. Honduras is the closest to achieving private cities. About one year ago, they passed a law allowing for ZEDEs (zonas de empleado y desarollo economico). ZEDEs can opt out of Honduran civil and commercial law, bringing in a legal system of their choosing. In order to internalize the gains from such changes, some companies have expressed interest in creating private cities similar to the ones described in my essay.

Entrepreneurs and the informal economy

Here is a very interesting new paper on the informal economy by Andrei Shleifer and Rafeal la Porta. It is great to see two prominent economists write on the subject. The abstract gives an overview of the first half of the paper:

We establish five facts about the informal economy in developing countries. First, it is huge, reaching about half of the total in the poorest countries. Second, it has extremely low productivity compared to the formal economy: informal firms are typically small, inefficient,  and run by poorly educated entrepreneurs. Third, although avoidance of taxes and regulations is an important reason for informality, the productivity of informal firms is too low for them to thrive in the formal sector. Lowering registration costs neither brings many informal firms into the formal sector, nor unleashes economic growth. Fourth, the informal economy is largely disconnected from the formal economy. Informal firms rarely transition to formality, and continue their existence, often for years or even decades, without much growth or improvement. Fifth, as countries grow and develop, the informal economy eventually shrinks, and the formal economy comes to dominate economic life.

I found the second half more interesting. They critique Hernando de Soto, who argues informal economies are an untapped reservoir of potential constrained by regulations. Because of the need for business permits and government recognition of property they are unable to enter the formal economy. Shleifer and la Porta find that most informal businesses are constrained by finance, not regulation, and fail to enter the formal economy. This suggests the problem is not regulation. Instead, they conclude:

The evidence suggests that an important bottleneck to economic growth is not the supply of  better educated workers; indeed, at least on many observable characteristics the workers are rather  similar in informal and formal firms. Rather, the bottleneck is the supply of educated entrepreneurs –  people who can run productive businesses. These entrepreneurs create and expand modern businesses  with which informal firms, despite all their benefits of avoiding taxes and regulations, simply cannot compete.

This is largely consistent with my experience during the last week in Honduras. I was interviewing with a firm run by an Italian. In his words, the firm imports business models from middle income countries, Mexico and Argentina, to low income countries, Honduras, Guatemala, and Nicaragua. His success, without substantial changes in economic freedom, suggests the problem is not institutional, but entrepreneurial. I very much look forward to more research along these lines.

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Exit and ideology

Exit, the ability to leave, has been gaining traction as an institutional arrangement. If exit costs are sufficiently low, people can choose the ideal community for their preferences. Further, the low exit costs force competition between institutional regimes to satisfy client preferences.

Though best enunciated by a liberal economist, Albert Hirschman, exit has largely been associated with the right. In America, secession, the ultimate form of exit, has forever been tainted by racism due to our own War of Secession. However, exit was once a celebrated value of the left. The Guardian, hardly a bastion of conservatism, offered mild support for the south during the American Civil War:

The great stumbling-block issue for the Guardian and many other liberals was the right to self-determination. The paper believed that the south had the right to secede and to establish an independent state.

Of course, if exit is to be a primary political value, the right to exit must extend to all persons, something the south did not do. While intellectually exit has been associated with the right, politically some the distinction is less clear. American states decriminalizing marijuana and legalizing gay marriage in contravention of federal laws has been a milder form of exit, in pursuit of leftist values.

In a very interesting piece Scott Alexander tries to reclaim exit as a liberal (in the modern American sense) value. He envisions competing communities:

Usually the communities are based on a charter, which expresses some founding ideals and asks only the people who agree with those ideals to enter. The charter also specifies a system of government. It could be an absolute monarch, charged with enforcing those ideals upon a population too stupid to know what’s good for them. Or it could be a direct democracy of people who all agree on some basic principles but want to work out for themselves what direction the principles take them.

While he desires a world government to prevent war and ensure the protection of children, he acknowledges that his ideas are largely analogous to Nozick and Moldbug, the advocates of libertarian exit and conservative exit respectively.

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